Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Good morning, and thank you, everyone, for joining our Sixth Annual Deutsche Bank Lithium Conference. I'm Corinne Blanchard, equity analyst for lithium for Deutsche Bank in the U.S. And we also have David Begleiter, senior lead analyst for chemical companies. We're very excited about today's lineup, and we thank every corporate participating this morning. We will start our conference with few company update and fireside chat from key lithium producer, including Albemarle, SQM, Ganfeng and Lithium Americas. After a quick break, we will continue with 4 panel. We will first focus on the Australian spodumene market with Pilbara, Tianqi and Mineral Resources. Next, we will discuss the new supply [ situation ] in Americas with challenges arising and new technologies needed. Third, we will then move on to pricing, demand and valuation trends for the industry with key expert and consultant. And for our last panel, we will discuss the increasing focus and necessity to our domestic and geographically vertically integrated supply chain, which could [ therefore, reduce ] dependency on China. I will now turn over the mic to David Begleiter, who will introduce our first speaker, Eric Norris, Albemarle Lithium President. David, over to you.

Corinne, thank you, and good morning as well. Again, my name is Dave Begleiter, and I cover U.S. chemicals here at Deutsche Bank. And I'm very pleased to have with us today the team from Albemarle, led by Eric Norris, President, Lithium. He's joined by his colleagues, Jim LaBauve, CFO of Lithium; and David Burke from the IR team. Before my session, Eric will make a few comments on Albemarle's lithium efforts. We'll go into the fireside chat portion of the session. And we will conclude at 8:30. So with that, Eric, it's all yours.

Thank you, David and Corinne. It's really a pleasure to be here with Jim and David to talk with you a bit more about lithium and the path forward and the growth. Just a couple of reminders. We may be making forward-looking statements today, and that is subject to certain risks and uncertainties. Those are covered in various SEC disclosures on our website. And similarly, we may be referencing non-GAAP financial measures, and a reconciliation of all of those is also available on our website. Just a quickie here. I think everybody may know who Albemarle is. But just a summary, we're $3-plus billion revenue, highly profitable specialty chemical company playing in 3 different businesses. I lead the Lithium business, but there are 2 others, Bromine and Catalysts. And we're leaders in all of those businesses. We had a reliable track record executing growth. A characteristic of Lithium, certainly, but also of our Bromine business is access to world-class, low-cost resources. We're fully integrated into those and have a footprint of conversion assets around the world. And we generate a lot of cash flow, that we then turn around and put into this attractive growth platforms, particularly in the lithium arena. It's really, Dave, and I know you're going to get into it with your question, an exciting time to be in this business. It's really -- you referenced this as your sixth year doing this conference earlier. It's been -- it's really a remarkable industry. I mean it's probably the most dynamic industry I've seen in the 30 years that I've been in this industry. And it's really attributable to several key factors, which I think many know. Consumers themselves have become just more conscious about global warning. Governments have established favorable policies to accelerate electrical vehicle growth. And after decades of investment by the battery industry, we're starting to see that cost come down, approaching that $100 a kilowatt hour cost, which is so pivotal for the tipping point for economics to be on even footing or better as time goes on versus internal combustion engines. And automotive industry at varied rates and times have declared full conversion of their fleets to electric vehicles and have pivoted their entire technological and strategic focus to that. So we've seen all of that start to play out this year. At the beginning of the year, we came out of the pandemic, the industry did, with growth that exceeded what we thought what we would see this year. We are seeing EV sales now up over 100% year-on-year versus the last year. In countries like China, it's 200%. Our outlook has increased versus last year for 2025 and 2030. And supply has come on to try to meet that, come back after the dip last year. But it struggled, too. And as a result, we're seeing very high prices. And finally, Dave, I'll just say this situation, we're very well positioned. Our strategy is based on 4 pillars. One is to grow through expansion of our conversion capacity in lithium and leverage those world-class resources. The second is to maximize productivity. We recently launched a very robust operating model that we've disseminated throughout all employees around the world to drive productivity and excellence in terms of how we execute. We've got a very strong discipline in how we invest, and our focus is on profitable growth while generating -- keeping financial return and supporting dividends. And we're really doing all of this around a platform, finally, of advancing sustainability across all of our businesses. So a super exciting time, and look forward to the dialogue with you, David.

Eric, thank you very much. That was excellent. So I will lead off here. First, some industry questions, Eric. Maybe first, on demand in 2021. How much has demand increased? And what's been driving this increase? Obviously, EV growth. But where has demand grown this year from '20 and even '19 levels?

As we -- a year ago this time, I would have said demand for 2020 would have been around the 300,000 metric tons on a lithium carbonate equivalent basis. And later, as we exited the year and looked back, it was in excess of that, in excess of 300,000 tons. And we have added -- we believe by the time this year is over, we'll be over 100,000 tons to market. So it's in excess of a 30% growth. I mean we won't be certain until we can move back and see the results and run our calculus on all of that, Dave. But I -- that's what it certainly seems like at this point in time, supported, as I indicated earlier, by the strong EV sales and I will say, over time, by increased battery size as well with a heavier growth in electric vehicles, pure electric versus hybrid electric vehicles.

Got it. And back in September at your Investor Day, you gave about 2025 forecast of 1.1 million metric tons, likely at 2.5 million to 2030. I'm talking about 30% compound growth to '25, high-teens over the next 5 years. Any further upside to those metrics? And again, maybe some of the key drivers beyond EV perhaps in the back half of the decade that you could highlight?

No. Any long-range forecast has similar characteristics in that we're -- we tend to have a higher degree of confidence on the 2025 number than we do in the 2030. We talked about over 1.1 million metric tons at that point in time. I think that feels still correct to us. There's certainly been, since -- even since that Investor Day, accelerated news and investment by battery producers and by OEMs around the world. We've seen an uptake recently here in the U.S. of investment interest. So we'll watch that carefully. As we look out to 2030, as I said, that just becomes inherently more uncertain. 2.5 million metric tons seems still correct. But given the pace of announcements, that too could -- or that could prove to be conservative.

Very good. Eric, maybe just looking at carbonate and hydroxide demand growth through 2025, how do you see those 2 diverging or converging going forward?

Well, as you may know, carbonate is a much bigger business today, a much bigger market today than hydroxide. Hydroxide is, as you may also know, is key to that longer-range electric vehicle that is really pivotal to gain economies of scale and penetration to drive that conversion from internal combustion engines across all -- the whole entire vehicle fleet. So hydroxide is going to see a stronger growth rate. I would tell you that the long-term growth rate for the whole business is probably in excess of 30%. And hydroxide is probably above that. Carbonate is probably marginally below that. Carbonate growth has been strongest in China, been strongest in the lower end of the electric vehicle for LFP batteries. And as you look at various automotive producers, you'll see varied projections of what they're seeing for that. As you look across the industry, it feels like that's a 25-ish percent number of total battery demand for LFP versus high nickel. But that's going to vary. Certain automotive producers have higher mix of that in their outlook than others.

Very good. Now switching to pricing. You referenced this earlier. It's been, at least from a benchmark pricing number, a phenomenal year in China, twice or 2.5-fold, at least. Can you talk about what's driven this exceptional pricing, especially in China? And how do you think prices will end for 2021 on maybe an industry or a benchmark level?

Yes. So if you look at the industry, you're right, it's been significant and most notable in China. As you also know, China is the only place where you really have a very visible or instantaneous, if you will, spot market price. That price started at $6 or $7 at the beginning of the year. For carbonate now, it's well over $30. So just a significant fivefold increase in the price. And you may ask and many ask, why in the world is that given such a short period of time over which it has transpired? I think it speaks to that rapid and unexpectedly strong recovery we had coming out of COVID naturally during COVID at the end of 2020. I'm talking as if COVID is behind us. It's still with us, but I think you know what I mean. And so when that became very huge in China, they have the most aggressive stance from a government incentives standpoint to drive EV adoption, maybe an even stronger mandate given sort of CO2 and air pollution in the country that they want to take a leadership position in EVs. And that strong demand met a very unprepared supply chain to respond, particularly in carbonate, but also in hydroxide. And so when you look at the relationship, particularly of availability of spodumene to needed conversion capacity to meet that growth in China, there's a deficit there that really led to that strong spike in pricing. So that's what's going on in the market. What's starting to happen now is those prices are remaining sustained high. Both carbonate and hydroxide on a spot delivered basis are over $30 per kilogram. And what you're now starting to see around the rest of the world is, most of the rest of the world works on a contracted basis, which lags that, is those contract prices around the world for various producers in the industry is starting to march up towards that high watermark that you're seeing in the spot market in China.

Eric, looking forward, how do you see this Chinese price trending over the next maybe 2 to 3 years?

I wish I had a crystal ball, David. I really do. I wouldn't have expected it to rise to the levels it has. Certainly, new recovery had to be underway to support the needed investment in capacity, but this is all-time high. So I -- it is hard to say. I can say this, if you just look at supply and demand, which is -- are the components that drive, obviously, that price, we don't see supply as we go into the next year barely being able to keep up with demand. We see another strong demand year in excess -- total excess of 100,000 met tons. And we see supply -- actually, we added up supply as slightly less than that. But for the purposes of the error in our analysis, it's probably aligned with that. So we don't see a loosening in the next 12 months. And so how price behaves as a consequence of that is, again, we can make a guess, but it's hard to say.

Understood. And that's my segue into supply. What's the time frame to bring on new supply in the industry? It varies greatly, I know. And at a high level, why is it's so difficult to bring on supply? And why does it takes so long to bring on supply in the lithium industry?

Well, I think there are a couple of -- I can go through various time lines for various resources and projects. Happy to do that. But in general, I'd say there are a couple of things. One is it's a fairly inexperienced industry. There's not -- the ability to build the conversion assets, for instance, isn't well honed. It isn't broadly known. And furthermore, to do that for battery grade quality, which requires a more precise, tailored product is even further less known. And that's obviously where all the growth is. Battery grade is what is required for these EV products. So that is one element of it. The other element of it is the resource development. Resources on the rock side probably can be brought to market from very start to finish, particularly in places like Western Australia, in a matter of 3 to 4 years. And there's -- and the processing technology is mature enough in that mining industry so that you can get a fairly -- if you got a decent enough resource, you can get a fairly consistent 6% spodumene grade or close to it. And that provides a level consistency from which we can process downstream. However, that's not enough to supply the whole industry. When you go to the brine industry, every brine deposit is different from the next. And so the process chemistry has to, at that level, has to be tailored to that prime, and that's process development. That's just -- that's like an R&D project, David. That takes time. And so it's proven that their -- if you look at it in the past, no brine resource that is commercial today has gotten to market sooner than 10 years, and that includes all of us. And so should that improve over time? I would expect so. But so far, it hasn't. So -- and then you add to that many of these primary sources are in remote areas, that are hard to access. And then you just add the normal regulatory time lines in mining that are standard for any metal, and there, you have that difficulty in the time line to get to market. In a market that's growing so fast, again, it puts a squeeze on supply, and hence, the price we're seeing.

Got it. And Eric, would you peg now the marginal cost reduction and maybe the cost differential between brine-based and rock [indiscernible] based lithium production?

Sure. So when the market was at 300,000 tons last year and a fairly depressed level, the supply that was in the market, marginal cash costs were probably $7 or so. That's an estimate. It would range around that depending on a variety of input costs. Today, that number is, with the supply that's needed to be in the market, the supply to the growth we're seeing, that's marked in the double digits at this point in time. So as far as carbonate and -- or excuse me, brine and rock, the answer on this, it really depends on what brine and rock you're talking about. So let me just say it this way, a top decile brine resource and a top decile spodumene resource, so you take -- and we know this because those are types of resources we play in. You take those resources and you compare them, the lowest-cost carbonate is from brine by several dollars versus hydroxide. However, because hydroxide -- you get the hydroxide from brine if it hit a second step, in 2 hydroxide, they're about -- they're fairly similar from those 2 different resources. Does that makes sense? I want to make sure I explain that correctly.

Yes. No, very clear. And lastly, here on the industry, where do you think lithium recycling will play going forward in meeting future lithium demand?

Well, recycling is an interesting area that we view as a future resource that we will be a part of. And so that's why we have an R&D development in it. That's why we've got a pilot element in it and a business development effort underway with the various parties looking to play in this space. And it's a very complicated ecosystem, right? When we say recycling, we're talking about playing in the lithium recycling from some mass that comes from that recycling process. We're not collecting batteries or looking to do those sorts of things. So it's a partnership. The approach is evolving. Business models are evolving, and technology development is required. In terms of what it looks like from a demand standpoint, remember that the -- the biggest bulk of volume that's going to come into the market is going to come from electric vehicles. And right now, the sort of the mass produced Model S is just coming -- it's getting close to its 10-year mark, and it's got a 10-year warranty on it. And there may be a second life in grid storage for some of those batteries. So we're not at a very large level of recycling right now. There's some from consumer batteries. There's some from such as electrical devices. There is some from scrap from existing producers who are -- who may have some scrap in their battery manufacturing process. But we're not talking about any more than maybe 10% of the market by the time you get out to the end of the decade. However, that's a sliding scale because as you go out from there, the mix can change. And so our view is we need to be building capabilities and assets that are flexible, that can handle virgin material today that we mine from these world-class resources and recycle the material tomorrow and there will be a transition over a multi-decade period of time from one to the next.

Very good. Switching now to more Albemarle-specific questions, Eric. Just on lithium pricing for next year, you've guided your prices would be up 15%, 20%. But given current market conditions, could that be a little bit conservative?

Well, we said at least 15% to 20%. And so that was our way of saying at the time that market forces were favorable. And to your earlier question, god knew what was going to happen with spot prices and we don't. Since then, spot prices have remained at a sustained high, even increased further. So I think while we won't issue more formal guidance until we release our fourth quarter earnings and give guidance for 2022. And obviously, price could be a very meaningful part of earnings growth for us. So we're -- we'll give more detail then. But I will say, given all the factors I just described, that guidance could prove to be a conservative price guidance.

No, very good. Just on capacity, Eric, you talked about your recent investments in China. And what's driving your decision to add capacity in China rather than in Western Australia going forward?

Okay. Well, our strategy -- there's a strategy around Asia, and there's a strategy around China versus non-China. So let me just say, our focus to be in China, first and foremost, is the market. More than half of the world's cathodes currently are today are made in China. And despite the efforts, we believe, of Europe and North America to add capacity, and you're seeing some capital capacity coming into Europe, you're hearing rumors of it but not seeing steel in the ground yet in the U.S., China is going faster. So that will actually increase through the middle of the decade, probably something close to 70% of the world's cathode capacity made in China. So the market is in China, first and foremost. Not that we don't think it'll shift, but it takes time for that to shift around the world. Secondly, China has established supply chain, low-cost labor. And by established supply chains, I mean, for capital goods. It has design institutes and know-how around these processes. China is the largest concentration of convergent assets in the world. And over time, that's built an ecosystem, a know-how and knowledge that we're tapping into by building there. So we are refining our capital execution, driving down our capital cost, going -- and getting better at building clients by being in China and at the same time, serving -- having the opportunity to serve the China market. The opportunity to be in Australia is just diversification as well as take some cost out. It adds to higher labor costs, higher capital costs. We expect that to come down as we get scale at Kemerton and drive experience that we've gained inside of China outside of China. But in some regards, it's a better footprint because you're not moving rock nearly -- dilute rock nearly as far. You're just moving it within country and then you're able to take the tailings from that rock and reclaim mine sites in the country -- in the region of Western Australia. So that's our rationale around Australia.

Got it. A few more minutes left here. Just really, first, in your contracting strategy. I always get a lot of questions on your long-term contracts. Can you discuss your strategy here? And what changes you made recently to reduce your earnings volatility of these long-term contracts and fuse some maybe more spot pricing-type mentality here?

Yes. So what we've done is we have a lot of fixed-price contracts previously going into 2020. And we -- because market prices fell so far, it fell even below what we consider marginal cash costs. We put -- our customers were in a tough situation from a competitive standpoint. So we gave some concessions. In some cases, greater concessions than others. Those areas where we gave greater concessions were coming back and have now since moved those to more -- or in the process of those more variable-based pricing mechanisms. In the spirit of we helped you through that tough time, now it goes the other way. I mean we see some exposure to this strong market. There are still customers, though, within our mix, and we don't give a lot of detail disclosing it, that we never gave much of a concession to. And we're not pushing -- steady, fair price, mid-cycle sort of customers that we've kept through this process. And so those might be more of our fixed sort of fill the base of our earnings stability sort of customers through the ups and the downs while we get more exposure to variable price from others. And as we recruit new customers, and believe me, with this capacity we're talking about going in China, there's new contracts we are in the process of developing, a lot of them potentially with OEMs going forward. Those tend to be more variable-priced contracts all the way around.

Very good. Maybe my last question, Eric. You recently opened a Battery Materials Innovation Center in Kings Mountain, North Carolina. So talk about how this new center will help you become a more important supplier to your customers, maybe transform Albemarle from a lithium producer into an advanced materials company?

Yes. I would say it's twofold, David. One is application. The other is innovation. So what I mean by that is we're building a capability to make batteries at a laboratory scale, so that would be house cell or cylindrical cell batteries that we can replicate exactly what our customers see. So what that allows us to do is look at process technology advantages. If we can change the particle size distribution of how we make our salts, our battery-grade salts or if we can change the impurity profile, what would that -- what does that do to the performance of the battery? Does it matter? Does it add value? We know that there are things we do in our manufacturing today that impact our -- the yields of cathode producers. So we know in the past we've done it wrong, and we know there's an opportunity to do it better. So this is allowing us to better able to tailor our products and meet their needs and, in fact, know how our materials perform in their products as well as or better than they do. And that platform then allows you to understand what's happening next in battery cells. And we're designing battery cells that are -- and the industry is looking at prelithiation. It's looking at solid electrolytes versus liquid electrolytes. It's looking at lithium metal anodes as opposed to graphite or silicon-dosed anodes. And so we are -- these new products -- this capability allows us to develop new products that -- based on lithium that will help increase energy density in the battery cell. And we've talked about some of those frontier chemistries in our Investor Day, for instance. So it's both to better serve our customers and to anticipate where they're going and sort of meet their needs for that new battery technology. That's what that capability is allowing us to do.

No, very good. With that, we'll wrap it up. Eric, Jim, David, thank you for your time. And everybody else, have a great day. And thank you.

David, thank you very much. Pleasure to be here.

Thank you.